Report: Gaming companies in trouble

TiareRath

SAN FRANCISCO (CBS.MW) -- Investors looking to make a buck by investing in gaming companies are rolling the dice with an industry whose growth is slowing, analysts and economists say.

The once-exploding gaming industry has simmered down, a result of anti-gambling efforts, better economic conditions, state lotteries and overbuilding in legal states. As a result, gaming stocks as measured by the CBOE Gaming Index have been hit hard, losing 40 percent of their value since June 1996 vs. a gain of about 50 percent in the Standard & Poor's 500 Index.

"It's been a very tough environment for the casino companies over the past few years," said Jason Aders, an analyst with Bear, Stearns & Co.

Part of the problem: the main action for most gaming companies is in the already crowded cities of Las Vegas, Atlantic City, N.J., and Reno, Nev. Hotel construction in Las Vegas is booming, but legal forms of gambling, such as state lotteries, are offering Americans gambling options other than a trip to The Strip.

To be sure, gambling is now legal in parts of many states, including Mississippi and Louisiana. And gaming on Indian reservations also benefits companies such as International Game Technology,
IGT, -2.24%
which makes slot machines.

Activists link gambling with social vices

While gaming companies have pushed for increased legalization to expand across state lines, anti-gambling activists have come out in force, stifling expansion into new areas by claiming that gambling is a vice associated with other damaging behaviors like alcoholism, and most recently, suicide.

A study released this week by University of California at San Diego sociology professor David Phillips showed that a higher rate of suicide was found in Las Vegas, Atlantic City and Reno, where almost all forms of gambling are legal. Las Vegas took the title of highest suicide rate in the nation, and in all three cities, the visitor rate of suicide was as much as four times the national average.

"Any time there's a study that comes out that highlights the negative externalities for gaming, it has negative impact on (companies') growth," Aders said.

"There is no question that being in the gaming business is a more perilous corporate existence to live," said John Rohs, an analyst with Schroder Wertheim. "The fact is that you're in some respects a duck in a shooting gallery for those who want to take the shots."

The study will certainly be used by anti-gaming advocates trying to prevent the expansion of what has become a popular American activity. Since 1988, the number of states allowing some form of gambling has increased to 23 from two.

Groups like the National Coalition Against Legalized Gambling have lobbied hard to prevent legalization. "(The companies) can't break into new states because our people are stopping them," said Bernie Horn, communications director for the coalition.

The growing gaming industry is also receiving opposition from politicians, particularly Republicans, who often don't support it as a means for state or personal economic growth, Aders said.

For example, while California allows horse betting, card rooms, the state lottery and bingo, state Attorney General Dan Lungren is setting up a division of gambling control in January to better regulate gambling within California.

There's gold in those California hills

"(Lungren) believes there is no need for an expansion of gambling in our state," said the attorney general's spokesman, Matt Ross.

The political and activist opposition has limited expansion into places like California, which could be a potential gold mine for gaming companies.

Major gaming companies such as Circus Circus
CIR, +0.70%
and Mirage Resorts
MIR, +0.00%
instead continue to look to Las Vegas, the king-city of American gambling, for the lion's share of their profits.

Las Vegas boomed in the mid-1990s, seeing a 15 percent increase in gaming revenue in 1994 alone. Positive numbers spurred Wall Street to get in the game, but since then growth has cooled, with Vegas pulling in revenue in 1996 that stayed in line with the increase in U.S. inflation, according to R. Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada at Las Vegas.

"This is not an expanding market," Horn said. "Without expansion, (the companies) will stagnate."

Increased competition for limited casino space has left companies battling it out for properties in the cities of Las Vegas, Reno and Atlantic City, Schwer said. Commercial construction growth is still at 10 percent in Las Vegas, twice the national average.

But much of the construction is larger companies taking over smaller hotels because the space to build new franchises has disappeared, he said. Send or read General Feedback StockChat is a free service from CBS MarketWatch

Where have all the bright lights gone?

States may not be offering the bright lights and big casinos like Las Vegas, but 90 percent of Americans have a betting opportunity within 200 miles, Aders said.

With increasing Internet usage, people are gambling more on the Web as well. "More people are gambling because gaming is more readily available than it ever has been before," he said.

The gaming industry isn't exactly struggling to keep its head above water, however. In 1996, Las Vegas earned $22 billion in visitor spending and gained $5.7 billion in gaming revenue, according to the Center for Business and Economic Research.

But in the changing industry, successful companies will be larger ones such as MGM Grand
MGM, +2.16%
and Harrah's Entertainment,
het
which can win bidding wars for properties and can offer entertainment, retail and casino combinations, Aders contended

"The key here is to have as many cash registers available for your customers, but not just in gaming," he said. "The days of just opening up a smoky Indian casino are in the days of the past."

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